Abstract

Firms increasingly respond to pressures to reduce their carbon emissions by implementing financial and non-financial carbon-related incentives that should align and motivate individuals’ behavior towards the goal of improved carbon performance. In this study, we explore whether and how the provision of financial and nonfinancial carbon-related incentives is associated with carbon performance. We exploit data about carbon emissions and carbon-related incentives that S&P 500 firms voluntarily disclose to the CDP. Correcting for sample-induced endogeneity, we find that financial carbon-related incentives are associated with superior carbon performance while nonfinancial carbon-related incentives are associated with inferior carbon performance. In line with agency theory, financial carbon-related incentives appear to motivate individuals and channel their efforts towards improving carbon performance. The negative association between nonfinancial carbon-related incentives, however, points to detrimental effects such as a crowding-out of intrinsic motivation and the occurrence of social comparison costs, which can be explained in the light of the general interest theory.